The case headed for bankruptcy court when Belmont Rock Holdings, a successor to Federal Del Rey Associates, filed a Chapter 11 petition a few days before the suit was to go to trial in March in Monterey County Superior Court.

The city sought damages of about $1.1 million from the developer in 2010, but Federal countersued, claiming Del Rey Oaks was trying to wrest away potential development rights worth $17 million. The countersuit asked the courts to block Del Rey Oaks from working with another developer.

The city tried to keep Federal's countersuit in local courts, saying the company was simply trying to throw up roadblocks against future development on the city's 360 acres on Fort Ord.

The city picked Federal in 2003 with its elaborate plans for luxury homes, a golf course and hotels. But the project failed to get beyond the drawing board and the city sued seven years later seeking compensation for predevelopment costs.

"The legal fees are mounting and draining our treasury, which is not good news," Dawson said. "The legal system plods along till someone is broke. The next bankruptcy will be ours, it looks like, if this thing keeps going."

The litigation has prevented Del Rey Oaks from moving ahead with another developer chosen recently — Brandenburg Properties of San Jose — to pursue more modest plans for the 360 acres.

In June, U.S. District Court Judge Paul Grewal rejected the city's request to return Federal's claim over development rights to Monterey County Superior Court. He said the bankruptcy court was best positioned to determine "the feasibility of severing state law claims from core bankruptcy matters."